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Axios: Bank Heads Warn of Looming Liquidity Crisis

Axios: Bank Heads Warn of Looming Liquidity Crisis
(Feverpitched/Dreamstime)

By    |   Monday, 21 October 2019 12:41 PM

A growing number of market analysts reportedly are warning that the repo market shock in September may have been the first signal of a wide-ranging liquidity shortage, and now those alarms are being echoed by the heads of major banks.

To be sure, strategists from JPMorgan Chase, Goldman Sachs and Bank of America sent recent notes also warning of the funding issues, Axos reported.

Additionally, "the increase of passive investments and major flows from pension funds and large asset managers into private equity funds is drying out typical sources of liquidity to the stock market and could mean major outflows in the face of bad news," Axos reported.

For its part, JPMorgan says the money-market stress that sent short-term borrowing rates surging last month is likely to get much worse despite the Federal Reserve’s attempts to inject billions of dollars into the financial system, Bloomberg explained.

The Fed has offered overnight loans and started buying up to $60 billion of U.S. Treasury bills a month in an effort to ease pressure in the vast repo market, where banks typically lend their assets in exchange for short-term financing. Secured lending rates shot up in late September, with analysts pointing to scarcity of interbank reserves as well as regulations that limit the size of bank balance sheets and their repo-lending capacity as the potential culprits.

JPMorgan says it’s not convinced the Fed has resolved the issues in the funding markets, according to a note from analysts led by Joshua Younger in New York. Funding pressures resurfaced last week even after primary dealers, firms approved to trade directly with the Fed, took all of the available overnight liquidity from the central bank and sold it as many T-bills as possible.

“Given the benefits of our newfound perspective, we recommend viewing these moves as highlighting the limitations of the Fed’s chosen solution to their operational issues,” the analysts wrote. “With year-end coming up, this is all likely to get much worse, in our view, before it gets better.”

The rate for overnight loans secured by general collateral first traded at 1.93%/1.92% Monday, an improvement from last week, when it traded at levels slightly over 2%.

The overnight liquidity provided by the Fed goes directly to primary dealers, whereas those most in need of it are the non-primary dealers, the JPMorgan analysts wrote. The success of the program therefore depends on how much of the liquidity is passed along, but primary dealers are deterred from doing so by rules specifying how much capital they must hold to protect against losses.

Others are voicing worried sentiment as well, Axios reported.

"Despite the fact that bank balance sheets are quite strong, I think you’ll see more moments like this going forward," Ron O'Hanley, president and CEO of State Street, said during the Institute of International Finance's (IIF) annual membership meeting on Saturday, Axios reported.

"Regulators have been very successful in distributing risk," O'Hanley said. "It’s now been very much deconcentrated. But it hasn’t gone away; it’s been moved," O'Hanley said.

Brian Porter, president and CEO of Scotiabank, said he also is worried about the health of the “shadow banking sector,” or firms that are not banks but lend money to consumers for things like auto loans or home mortgages and aren't subject to the same regulations.

The shadow banking sector is largely private and little is known about how much money the insurance companies, hedge funds, private equity funds and payday lenders that make up the industry actually have, Axios explained.

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A growing number of market analysts reportedly are warning that the repo market shock in September may have been the first signal of a wide-ranging liquidity shortage, and now those warnings are being echoed by the heads of major banks.
bank, heads, liquidity, crisis
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2019-41-21
Monday, 21 October 2019 12:41 PM
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